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REPORT TO
THE MINISTER OF FINANCE

INTRODUCTION

1. On July 14, 1994, the Canadian International Trade Tribunal
(the Tribunal) received terms of reference1 from the Minister of
Finance (the Minister) pursuant to section 19 of the Canadian
International Trade Tribunal Act.2 The Minister directed the
Tribunal to investigate requests from domestic producers for tariff
relief on imported textile inputs for use in their manufacturing
operations and to make recommendations in respect of those requests
to the Minister.

2. On October 2, 2003, pursuant to the Minister's reference, the
Tribunal received a request from Sunshine Mills Inc. (Sunshine), of
Toronto, Ontario, for the immediate removal, for an indeterminate
period of time, of the customs duty on importations from all
countries of certain combed ring-spun cotton yarns for use in the
manufacture of woven fabrics. Sunshine also sought tariff relief
retroactive to March 1, 2002.

3. On January 27, 2004, being satisfied that the request was
properly documented, the Tribunal issued a notice of commencement
of investigation,3 which was distributed to known interested
parties. The yarn under investigation was described in the notice
as "cotton yarn (other than sewing thread), single, solely of
cotton, combed, not put up for retail sale, ring-spun, unbleached,
measuring less than 166 decitex,[4] of subheading No. 5205.24,
5205.26 or 5205.27, for use in the manufacture of woven fabrics"
(the subject yarn).

4. As part of the investigation, the Tribunal's research staff
sent questionnaires to potential producers of yarns identical to or
substitutable for the subject yarn. A request for information was
also sent to potential users and importers of the subject yarn. A
letter was sent to the Canada Customs and Revenue Agency (CCRA),
now the Canada Border Services Agency, requesting a complete
description of the physical characteristics of the samples
submitted by Sunshine, an opinion on whether the requested tariff
relief would be administrable, and suggested wording to describe
the subject yarn, should tariff relief be recommended. Letters were
also sent to the Department of International Trade (DIT) and the
Department of Industry, requesting information that could assist
the Tribunal in its investigation.

5. A staff investigation report, summarizing the information
received from the CCRA, DIT, Sunshine and Atlantic Fine Yarns Inc.
(Atlantic), was provided to those that had become parties to the
proceedings by filing notices of appearance in the investigation.
Following distribution of the staff investigation report, Atlantic
and Sunshine filed submissions with the Tribunal.

6. Given that there was sufficient information on the record,
the Tribunal decided that a public hearing was not required for
this investigation.

PRODUCT
INFORMATION

7. Although the request for tariff relief covers yarns imported
from all countries, Sunshine imports the subject yarn from India,
Pakistan and Egypt. It submitted three samples of single,
unbleached, ring-spun yarn of combed fibres, measuring 152 decitex,
116 decitex and 98 decitex, with its request for tariff relief.

8. According to Sunshine, the subject yarn is required for
high-efficiency warping5 and high-speed, air-jet weaving. In general
terms, the production process entails the following steps:

· The yarn, received on cones, is set up as a warping
creel6 and wound on large (2,200-mm-wide) metal
cylinders called warp beams.

· Up to 28 warp beams are assembled on a sizing machine, where
sizing chemicals7 are applied to strengthen the yarn for
high-speed weaving.

· The sized warp beams are then put on the high-speed, air-jet
weaving machines (Picanol Omni Plus), where the weft yarn is
inserted in a direction perpendicular to the warp yarn using
compressed air and is thereby woven into greige fabric.

· The fabric is wound on large rolls of 500 to 5,000 metres,
depending on customer requirements, and is then inspected for
defects, packed and shipped.

Sunshine indicated that none of the above-mentioned processes
are subcontracted.

9. As of January 1, 2004, the subject yarn, classified for
customs purposes under tariff item No. 5205.24.90, 5205.26.90
or 5205.27.90 of the schedule to the Customs
Tariff,8 is dutiable at 8.0 percent ad valorem
under the Most-Favoured-Nation (MFN) Tariff and at 5.5 percent
under the Costa Rica Tariff, and is duty free under the United
States Tariff, the Least Developed Country Tariff, the Mexico
Tariff, the Canada-Israel Agreement Tariff and the Chile
Tariff.

REPRESENTATIONS

Weaving
Industry

Sunshine

10. Sunshine has been producing greige fabrics of 100 percent
cotton and polyester/cotton blends since May 2002 at its plant
located in Tracadie-Sheila, New Brunswick. It indicated that it is
a start-up company in a remote area. The fabrics produced by
Sunshine are used primarily in the manufacture of home
furnishings.

11. Sunshine claimed that there are no identical or
substitutable yarns available from Canadian sources. It indicated
that the removal of the customs duty on imports of the subject yarn
would allow it to compete for market share with Asian fabric
manufacturers that have access to the subject yarn, either as local
production or as duty-free imports. It stated that Asian countries
have the further advantages of cheap labour and government
incentives and subsidies. It alleged that, because of the duties on
the subject yarn, it has not been able to sell fabrics in the
Canadian market. Moreover, due to its recent entry as a Canadian
manufacturer, Sunshine has access to only a small amount of tariff
preference levels (TPLs)9 and, as a result, must pay duties on 80
percent of its exports to the United States.

12. Sunshine indicated that, before commencing operations, it
believed that there were no duties on imports of 100 percent cotton
yarn in counts of 32/1 and finer used in the weaving10 of greige
fabrics. It stated that this point was crucial, since its
feasibility study was based on the production of greige fabrics
with imported yarn in fine counts. Sunshine stated that the duties
on the subject yarn have had a serious negative impact on its
profitability, particularly in the current economic situation.

13. Sunshine stated that tariff relief would allow it to be more
competitive in the export market and in the more price-sensitive
Canadian market in relation to cheaper imports of fabrics. It also
indicated that its sales would increase in both markets and that
potential expansion and job opportunities at its manufacturing
facility could result. Sunshine stated that it currently employs
110 people in a high-unemployment area of New Brunswick and that
these jobs are at risk.

14. In its submission of April 26, 2004, Sunshine stated that,
after repeated efforts to obtain identical or substitutable yarns
from Canadian sources, the evidence clearly indicates that such
yarns are not produced in Canada. In November 2002 and March 2003,
it asked Atlantic to quote prices for 100 percent cotton yarn in
fine counts, but was unsuccessful in obtaining quotes. On April 10,
2003, Sunshine placed an advertisement in a major Canadian
newspaper requesting expressions of interest from Canadian
manufacturers for the supply of weaving yarns, but none came
forward. In June 2003, it asked the Canadian Textiles Institute
(CTI) which Canadian yarn manufacturers might be able to supply
identical or substitutable yarns. The CTI identified two potential
suppliers: Atlantic and Cavalier Textiles.11 Sunshine was not
successful in its efforts to obtain such yarns from these
suppliers. Moreover, it submitted, there is no indication that
supply will be available in the foreseeable future. It submitted
that it would consider purchasing identical or substitutable yarns
from Canadian sources, but that, in light of the foregoing, it has
no choice but to import the subject yarn and pay the duties.

15. Sunshine submitted that the removal of tariffs on the
subject yarn would not result in any cost to Atlantic since it does
not produce identical or substitutable yarns in commercially
available quantities, nor is it a supplier of such yarns.
Therefore, Sunshine submitted, Atlantic cannot lose sales of yarns
to Sunshine or any other producer of woven greige fabrics in
Canada. It also submitted that tariff relief would not have any
effect on Atlantic's planned expansion. Sunshine submitted that the
evidence demonstrates that Atlantic has not taken any steps to
produce identical or substitutable yarns, despite repeated requests
for quotes from Sunshine. It submitted that, although Atlantic has
suggested that it could convert its capacity to produce identical
or substitutable yarns, there is no evidence that it has done so or
that it has taken steps to promote or demonstrate its capability to
produce such yarns. According to Sunshine, the evidence indicates
that Atlantic only produces 100 percent cotton and polyester/cotton
ring-spun yarns of lower counts, which are not covered by
Sunshine's request.

16. Sunshine submitted that the payment of duties on the subject
yarn has had a serious negative impact on its profitability. It
submitted that, since March 1, 2002, the payment of duties has
seriously affected its cash flow and has made it difficult to keep
an inventory of the subject yarn. Sunshine submitted that, at
certain times, it has had to close its plant because of the lack of
cash flow and inventory of yarn. It submitted that these are
exceptional circumstances that warrant retroactive tariff relief
and that failure to receive such relief would seriously jeopardize
sustained production at its plant, as well as its financial
viability and employment.

17. In its reply submission,12 Sunshine submitted that
Atlantic did not provide price quotes for 100 percent cotton
yarn in fine counts when requested. It submitted that Atlantic's
participation in the Tribunal's January 2002 and February 2004
investigations does not demonstrate Atlantic's intention to produce
identical or substitutable yarns, as the investigations dealt with
combed or carded ring-spun cotton and polyester/cotton yarns for
use in the manufacture of knitted fabrics and garments. Moreover,
the Tribunal found that Atlantic was unable to produce fine yarns
for knitted fabrics and garments. Sunshine submitted that the
subject of this investigation is ring-spun cotton yarn for weaving
and that Atlantic's purported excuse for refusing to supply
identical or substitutable yarns to Sunshine, i.e. because it is
unable to obtain insurance, is a purely commercial matter that has
no bearing on this investigation. Sunshine submitted that, if
Atlantic wanted to supply Sunshine, it could have done so through
other commercial credit arrangements, such as advances against
orders, cash before delivery or letters of credit. Sunshine
submitted that Atlantic is not interested in obtaining its
business, as it has not vigorously pursued its business by
providing competitive prices and workable commercial terms, even
for non-subject yarn.

Yarn
Industry

Atlantic

18. Atlantic, of Mississauga, Ontario, was founded in 2000 to
produce ring-spun yarns in Pokemouche, New Brunswick. Its
ring-spinning facility is to be completed in four phases. Phase 1
production commenced on October 15, 2001. According to Atlantic,
the machinery in Phase 1 is capable of producing 14 million
kilograms per year of 100 percent cotton and polyester/cotton
ring-spun yarns with counts ranging from 130s to 6s in both combed
and carded yarns. Atlantic indicated that, subject to the viability
of Phase 1, it plans to embark on Phase 2 at an additional cost of
$70 to $80 million. Phase 2 would provide an additional 14 million
kilograms of production capacity per year of 100 percent cotton and
polyester/cotton ring-spun yarns with counts ranging from 130s to
6s.

19. Atlantic stated that, if financial results were achieved
from Phases 1 and 2 as anticipated, Phases 3 and 4 would be
completed within five years. This would add ring-spun yarn
production facilities of between 250,000 and 300,000 square feet.
Atlantic also indicated that the potential for expansion of the
market for ring-spun yarns in North America is enormous.

20. Atlantic opposed Sunshine's request for tariff relief on the
grounds that it would constrain further expansion of ring-spun yarn
production in Canada. Atlantic stated that, because of NAFTA
content requirements, duty-free treatment of Sunshine's exports of
greige fabrics to the United States, and possibly Latin America,
would not be available. Moreover, Atlantic stated that tariff
relief is not justified because of the small volumes of imports of
greige fabrics with which Sunshine must compete.

21. Atlantic indicated that it would take a certain period of
time to convert part of its production capacity to produce
identical or substitutable yarns. If its whole plant were converted
to the production of identical or substitutable yarns by running
American Pima13 cotton, Atlantic stated, it could produce
such yarns immediately.

22. In its response submission of May 4, 2004, Atlantic stated
that, contrary to assertions made by Sunshine, it has always been
Atlantic's intention to produce fine count, combed ring-spun yarns,
including the subject yarn. According to Atlantic, this is
evidenced by its participation in the Tribunal's January 2002 and
February 2004 investigations regarding such yarns. Atlantic
submitted that it has the capability to produce identical or
substitutable yarns, but that there has not been a viable Canadian
market for such yarns. Atlantic submitted that it is Sunshine's
inability to meet the standard commercial conditions (credit terms
from 30 to 60 days, depending on price, but subject to being able
to insure the customer) applied to all Atlantic customers that
prevents the production of this type of yarn in Canada.

OTHER
INFORMATION

23. DIT informed the Tribunal that Canada does not maintain
quota restraints on the subject yarn. The CCRA indicated that there
would be no additional costs, over and above its normally incurred
costs, to administer the tariff relief should it be granted on the
subject yarn.

ANALYSIS

24. The Minister's terms of reference direct the Tribunal to
assess the economic impact on domestic textile and downstream
producers of reducing or removing a tariff and, in so doing, to
take into account all relevant factors, including the
substitutability of an imported fabric for a domestic fabric and
the ability of domestic producers to serve the Canadian downstream
industries. Consequently, the Tribunal's decision on whether to
recommend tariff relief is based on the extent to which it
considers that such tariff relief would provide net economic gains
for Canada.

25. According to Sunshine, there are, at present, no domestic
yarn producers that make identical or substitutable yarns in the
finer counts. Atlantic opposed Sunshine's request for tariff relief
on the basis that Atlantic could convert part of its current
production capacity to the production of identical or substitutable
yarns and that such relief could constrain further expansion of its
ring-spun yarn production in Canada.

26. The Tribunal notes that no domestic yarn producer, other
than Atlantic, has opposed Sunshine's request for tariff relief.
Although Atlantic indicated that it could convert part of its
production capacity to produce identical or substitutable yarns, it
provided no commercial information on the yarns that could be
produced. Moreover, it provided no evidence that it has taken
action to produce identical or substitutable yarns. In this regard,
the Tribunal notes the e-mail exchanges14 of November 2002 and
March 2003, in which Atlantic admitted that it is "not able to
offer weaving yarns in ring spun carded or combed" and that it has
"no intentions of producing" fine count, combed, ring-spun, 100
percent cotton yarns. Therefore, the Tribunal is of the view that
production of such yarns at Atlantic is not imminent and that
Atlantic is not currently in a position to supply commercial
quantities of identical or substitutable yarns.

27. In order to conclude that Atlantic has the ability to supply
identical or substitutable yarns, the Tribunal would require
evidence, such as concrete plans to convert production capacity and
orders on hand. As stated by the Tribunal in previous cases, it is
the responsibility of the domestic producers to provide evidence,
not just assertions or allegations, of their ability to produce
identical or substitutable products.15 Therefore, the Tribunal
concludes that Atlantic has not demonstrated, to the Tribunal's
satisfaction, that it will be able to supply identical or
substitutable yarns to Sunshine and other potential buyers in the
foreseeable future.

28. As noted above, Atlantic stated that Sunshine is unable to
meet the standard commercial conditions that apply to all its
customers, thereby preventing Atlantic from producing identical or
substitutable yarns in Canada. On this issue, the Tribunal is of
the view that, in all likelihood, some form of commercially
acceptable alternative arrangement could have been established by
Atlantic and Sunshine. In this regard, the Tribunal notes that
Sunshine has clearly concluded satisfactory credit arrangements
with foreign suppliers to obtain the subject yarn.

29. In light of the foregoing, the Tribunal is of the view that
there are no domestic yarns identical to or substitutable for the
subject yarn. Therefore, although the government would forgo the
corresponding duty revenues, which are estimated to be over
$750,000 annually, prior to any duty drawback,16 the
Tribunal does not believe that there are likely to be any direct
commercial costs to Atlantic associated with the removal of the
customs duty on the importation of the subject yarn. On the basis
of the information provided to the Tribunal, tariff relief would
provide yearly benefits to users of the subject yarn, particularly
Sunshine, in the form of reduced costs, which could translate into
an improvement of their competitive position in the Canadian and
U.S. markets, as well as benefits in terms of employment in New
Brunswick, and lower prices for downstream users and consumers. In
summary, the Tribunal finds that the tariff relief requested by
Sunshine would provide net economic gains for Canada.

30. Sunshine requested that tariff relief be retroactive to
March 1, 2002. The evidence presented to the Tribunal to justify
such a request is that the payment of duties on the subject yarn
has seriously affected its cash flow and that this has made it
difficult to keep the subject yarn in inventory, causing it to
close its plant at certain times. Furthermore, as outlined above,
Sunshine tried diligently to find a domestic source of the subject
yarn, trying several reasonable avenues over a period of months.
When these attempts failed, Sunshine acted promptly to request
tariff relief. In the Tribunal's view, this constitutes
circumstances that warrant retroactive tariff relief. The Tribunal
is persuaded that, unless prompt and appropriate action is taken to
allow for the refund of some or all of the duties already paid,
Sunshine's profitability will be adversely affected. Therefore, in
this case, the Tribunal considers it appropriate to recommend that
the tariff relief be retroactive to October 2, 2003, the date on
which the request for tariff relief was filed with the
Tribunal.

RECOMMENDATION

31. In light of the foregoing, the Tribunal hereby recommends to
the Minister that tariff relief be granted, for an indeterminate
period of time, on importations from all countries of cotton yarn
(other than sewing thread), single, solely of cotton, combed, not
put up for retail sale, ring-spun, unbleached, measuring less than
166 decitex, of subheading No. 5205.24, 5205.26 or 5205.27, for use
in the manufacture of woven fabrics.

32. The Tribunal further recommends that the tariff relief be
retroactive to October 2, 2003.

9 . The
North American Free Trade Agreement, 32 I.L.M. 289 (entered
into force 1 January 1994) [NAFTA] provides preferential
tariff treatment for certain quantities of textile goods despite
their incorporation of non-North-American (i.e. non-originating)
inputs. This preferential tariff treatment takes the form of
Canadian TPLs. TPLs permit the import of a fixed quantity of
certain textile goods into Canada, the United States and Mexico at
the NAFTA rate of duty. Goods entering a NAFTA
country in quantities above the TPLs are subject to the higher MFN
rate of duty. A new method of determining duty drawback, called
"the lesser-of concept", was introduced in NAFTA. Under this
new scheme, the duty drawback, or refund, is equal to one of the
following amounts, whichever is less:

(a) the duties paid on the goods imported into Canada; or

(b) the duties paid on the finished goods when exported to the
United States.

10 .
Indeterminate tariff relief exists for certain combed or carded
ring-spun yarns (count of 31/1 and finer) for use in the
manufacture of knitted fabrics or knitted garments.

12 . On
April 26, 2004, Sunshine filed a response submission with the
Tribunal, which included some documents (Tabs 1, 2 and 3) regarding
its efforts to obtain the subject yarn from Canadian sources. The
Tribunal considered these documents to be new information.
Accordingly, the parties of record were given an opportunity to
provide comments on this new information. Only Atlantic filed a
submission.

13 .
Pima is a fine cotton, light tan in colour, and the staple averages
4 cm. It is named after Pima County, Arizona.

16 .
Sunshine is eligible for duty drawback on the subject yarn used to
manufacture fabrics currently exported to the United States above
the TPLs. Therefore, corresponding duty relief on the subject yarn
is, in reality, lower than the stated figure.